Sydney

Investment case for sustainability still strong, despite the economic downturn

2009-03-03T06:00:00Z

Jones Lang LaSalle’s annual Survey of Investor Sentiment shows 18% of Australian investors still willing to pay for a more sustainable investment.

SYDNEY, 3 MARCH 2009 – Sustainable investment decisions are still being made in the current economic environment, even though Australian investors are re-prioritising in the current market, according to recent research from Jones Lang LaSalle.

Today, 18% of Australian investors would pay more for a sustainable commercial office building, all other things being equal, compared to 29% in 2007, according to Jones Lang LaSalle’s annual Survey of Investor Sentiment, undertaken in November 2008.

Anita Mitchell, Head of Energy & Sustainability Services Australasia, who is speaking at the Green Cities 09 Conference in Brisbane this week, says that while the survey results reflected the tighter cost control environment that was currently being implemented by Australian companies, overall the results showed that the market was still driving sustainability.

"In the current difficult operating environment, we would have expected to see a sharper drop in the number of investors willing to pay more for sustainable buildings, but the message from the survey is that sustainability has not dropped off the business agenda.

"When you look at the survey results, over 50% of investors continue to consider sustainability a ‘tie-breaker’ factor in investment decisions. However, there is no doubt that investors are categorising sustainability as a longer-term issue than they have in the past. The percentage of investors who rated sustainability as a long-term issue [one that will become critical over the next 5-10 years] jumped from 4% in the 2007 survey to 18% in 2008.

"However, this percentage jump may simply be a reflection of commencement dates for the upcoming development pipeline, as many projects nationally have either been postponed or cancelled due to the current difficulties in obtaining credit.

"And many investors do still see sustainability as a near-term issue, with 36% saying sustainability would be critical within 12 months, a drop from 57% in 2007, but still ahead of the 24% recorded in 2006 ," Ms Mitchell said.

"The results clearly show a fundamental shift in the way building owners, investors and tenants all consider green buildings," says the Chief Executive Officer of the Green Building Council of Australia, Romilly Madew.

"Green building is now seen as a smart business move. Since 2002, when the Green Building Council of Australia was established, tenant demand for green building has skyrocketed, government regulation has tightened and energy prices have become more volatile.

"What’s more, the world has woken up to the human costs of climate change, and corporations want to occupy green buildings to demonstrate their commitment to sustainability and reinforce their brand’s corporate social responsibility," Ms Madew says.

Market drivers for sustainability remain strong

The survey found that market drivers for sustainability remain strong. The survey showed that the impact on rentals (51%) and building valuations (49%) remains strong, and now eclipses the focus on achieving reductions in outgoings, which has actually lessened (40% now compared to 60% in 2006).

"This result is not surprising, with the heightened focus on the financial bottom line, investors are looking hard at the business case for sustainability," Ms Mitchell said.

"I believe we are now witnessing a flight to quality. Investors will put their money into maintaining a quality asset or portfolio that is positioned for both short-term survival and long-term growth. They will also demand to see the financial return, in terms of both income and asset value from their investment in these initiatives.

"The results do suggest that investors have skimmed the cream off the top of their sustainability initiatives through outgoings reductions. However, with universal predictions of increases in utilities and waste disposal costs, we cannot underestimate the importance that efficiencies in this area will play moving forward."

Tenant demand the strongest driver

For the third year in a row, respondents to the survey highlighted tenant expectation as the most significant issue when considering sustainability (a relatively stable 74%).

"With the increased focus on costs in the current economic environment, investors are seeing the value of sustainable buildings to assist them to meet the demand from tenants for occupying green space.

"To put this in perspective, a Global CoreNet-JLL Survey conducted in September 2008 found that 42% of corporate real estate (CRE) executives were willing to pay a premium rental (usually 1 to 5%) to lease green space. In addition, 67% of respondents said that sustainability is a critical CRE issue today," Ms Mitchell said.

Green ratings maintaining momentum

In line with this, achieving green ratings continued to be ranked the second most important driver (74%), a steady increase in importance since 2006 (64%).

"This result shows that the green rating tools, such as Green Star and NABERS, are successful in driving the uptake of sustainability in the market. It also reinforces the fact that green rating tools are being seen as fundamental to achieving increased rentals and building valuations from sustainability initiatives."

Data measurement and reporting an increasing issue

In addition to these market drivers, a huge increase was recorded in investors rating data measurement and reporting as a priority, jumping from 14% in 2007 to 29% in 2008. The percentage figure for 2008 has tripled since the 2006 survey.

"The increase in importance of data measurement and reporting is no doubt being driven by legislative changes, including the Energy Efficiency Opportunities Act and National Greenhouse and Energy Reporting Act," Ms Mitchell said.

"These regulatory systems require many building owners and occupiers to disclose the energy and greenhouse performance of their assets and identify and report on opportunities to improve energy efficiency."

Ms Mitchell said the onset of a Carbon Pollution Reduction Scheme was also playing a large role in driving the focus on sustainability, even though property is not specifically included in the scheme.

"The government’s proposed Mandatory Disclosure of Commercial Building Energy Efficiency is yet another move that is driving the market to be more transparent about performance. Gone are the days when you could hide a poor performing asset. These regulatory drivers are increasing the awareness amongst investors and owners of the need for accurate data on the sustainability of their buildings and how the built environment can contribute to reducing carbon emissions.

"The results from the survey give us reason to believe that sustainability initiatives will survive the current tough economic times, despite views from some that these initiatives could be scaled back to save money," Ms Mitchell said.